The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

by Larry E. Swedroe, Jared Kizer

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Overview

The rewards of carefully chosen alternative investments can be great. But many investors don’t know enough about unfamiliar investments to make wise choices.   For that reason, financial advisers Larry Swedroe and Jared Kizer designed this book to bring investors up to speed on the twenty most popular alternative investments:

Real estate, Inflation-protected securities, Commodities, International equities, Fixed annuities, Stable-value funds, High-yield (junk) bonds, Private equity (venture capital), Covered calls, Socially responsible mutual funds, Precious metals equities, Preferred stocks, Convertible bonds, Emerging market bonds, Hedge funds, Leveraged buyouts, Variable annuities, Equity-indexed annuities, Structured investment products, Leveraged funds  

The authors describe how the investments work, the pros and cons of each, which to consider, which to avoid, and how to get started. Swedroe and Kizer evaluate each investment in terms of:

  • Expected returns
  • Volatility
  • Distribution of returns
  • Diversification potential
  • Fees
  • Trading and operating expenses
  • Liquidity
  • Tax efficiency
  • Account location
  • Role in an asset-allocation program 

Any investor who is considering or just curious about investment opportunities outside the traditional world of stocks, bonds, and bank certificates of deposit would be well-advised to read this book.

Product Details

ISBN-13: 9781576603109
Publisher: Wiley
Publication date: 11/12/2008
Series: Bloomberg Series , #42
Pages: 320
Product dimensions: 6.40(w) x 9.00(h) x 1.20(d)

About the Author

Larry E. Swedroe is a principal and the director of research for Buckingham Asset Management, LLC (www.bamservices.com). He is the author of several books, including Wise Investing Made Simple and The Only Guide to a Winning Investment Strategy You'll Ever Need, and coauthor of The Only Guide to a Winning Bond Strategy You'll Ever Need. Swedroe received his MBA in finance from New York University. He lives in St. Louis.

Table of Contents

Acknowledgments.
Introduction.
A Travel Guide to Alternative Investments.
Modern Portfolio Theory.
The Good, the Flawed, the Bad, and the Ugly.  

PART 1 The Good.  
Chapter 1 Real Estate.
Historical Returns and Risk: U.S. Real Estate, U.S. Equities, and International Equities.
The Diversification Benefits of REITs.
Benefits of Diversification: Sample Portfolios.
Asset Location and Real Estate.
Recommended Investment Vehicles.
International Real Estate.
DRW, RWX, and WPS.
DFA International Real Estate Securities Portfolio.
Tax Considerations.
The Wrap-Up on International REITs.
Your Home and the Asset Allocation Decision.
Wrap-Up on the Home as an Investment.
Wrap-Up on Direct Ownership.
Summary.  

Chapter 2 Inflation-Protected Securities.
Real or Nominal Return Bonds: Which Are Riskier?
TIPS: Doing the Math.
Correlations with Equities and Inflation.
Inflation, Price, and Interest Rate Risk.
Inflation Risk.
Price Risk.
Interest Rate Risk.
TIPS: Pros and Cons.
Pros.
Cons.
Allocating Between Real and Nominal Return.
Fixed-Income Assets.
A Shifting Allocation Approach. 
Developing a Strategy.
Implementation.
A Shifting Maturity Strategy.
I Bonds.
Summary.  

Chapter 3 Commodities.
Correlation with Stocks, Bonds, and Inflation.
Event Risk.
A Risk-Reduction Tool. 
Portfolio Efficiency.
Gaining Exposure to Commodities. 
Mutual Funds: QRAAX and PCRIX. 
Commodity-Related ETFs.
Commodity-Related ETNs.
CTAs.
The Argument Against Investing in Commodity Producers.
The Equities of Oil Producers.
Implementation.
Summary.  

Chapter 4 International Equities.
|Emerging Markets Equities. 
Correlations.
Sample Portfolios.
The Risks of Investing in Emerging Markets. 
Small-Cap and Value Stocks.
Recommended Vehicles.
Wrap-Up: Emerging Markets.
International Small-Cap Stocks.
Sample Portfolios.
Recommended Vehicles.
Summary.  

Chapter 5 Fixed Annuities.  
How Long Do Payments Continue?
Determinants of Payment Size. 
The Benefits of Annuitization. 
Mortality Credits Make It Possible.
When Annuities Can Be the Right Choice. 
Evidence from Academia.
When to Purchase a Fixed Annuity.
Inflation-Indexed Immediate Annuities.
Summary.  

Chapter 6 Stable-Value Funds.  
Unique Risk and Return Characteristics. 
Investment Portfolios.
Risks. 
Costs.
Restrictions.
Returns Change Slowly Over Time.
Cash Flows Can Affect Returns. 
Summary.  

PART 2 The Flawed.  
Chapter 7 High-Yield (Junk) Bonds.
Explaining the Low Correlation.
Is Higher Yield Worth Higher Risk?
The Importance of Equity Risk.
Hybrid Securities and Asset Allocation. 
Evidence Supported by Theory.
Do High-Yield Bonds Have a Role?
Illiquid Securities.
Other Negative Characteristics.
Distribution of Returns Matters.
High-Yield Bonds and Efficient Frontier Models.
Inflation Risk.
Asset Location.
The Need for Diversification.
The Historical Evidence.
Vanguard High-Yield Corporate Fund.
More Efficient Alternatives.
Summary.  

Chapter 8 Private Equity (Venture Capital).
Origins.
The Attraction. 
The Historical Evidence.
Characteristics of Private Equity Returns.
Venture Capital Versus Publicly Traded Securities.
Inefficient Diversification.
Bias in the Data.
Perception Versus Reality.
Private Equity’s Role in a Portfolio.
Nonmonetary Explanations for Private Equity Investing. 
Summary.  

Chapter 9 Covered Calls.
Taxes Matter.
Transactions Costs.
An Alternative Strategy. 
Summary.  

Chapter 10 Socially Responsible Mutual Funds.
Defining SRI.
Rapid Growth.
Does Socially Responsible Investing Come at a Price?
The “Price” of Principles.
Summary.  

Chapter 11 Precious Metals Equities.
Risk.
Returns.
Correlations.
The Hedging Value of PME.
Positive Attributes of PME.
Other Considerations.
Implementing the Strategy.
Summary.  

Chapter 12 Preferred Stocks.
Long Maturities.
Risks and Rewards of Long Maturities.
Call Risk.
Credit Risk.
Long Maturities and Call Risk.
Dividend Suspension.
Preferential Treatment for Corporate Buyers.
Other Considerations.
Tax Advantages.
Summary.  

Chapter 13 Convertible Bonds.
The Realities of Convertible Bonds.
Considerations.
Shifting Asset Allocation.
Asset Location.
Complexity.
Summary. 

Chapter14 Emerging Market Bonds.
Risks.
Returns.
Correlations.
Potential Positives.
Additional Considerations. 
Summary.  

PART 3 The Bad.  
Chapter 15 Hedge Funds.  
Exclusive Nature.
Why Hedge Funds Aren’t Mutual Funds.
Facts Versus Fantasies.
Hedge Fund Risks.
Wisdom and Experience, or Hope and Hype?
The Cost of Folly.
How High an Alpha Does a Hedge Fund Need?
How Funds of Funds Increase Hurdles to Outperformance.
The “Ill-Logic” of Hedge Funds.
Long-Term Capital Management.
The Death of Genius.
LTCM’s Downfall: The Tyranny of Market Efficiency.
Risk Versus Uncertainty.
Fooled by Randomness.
Summary.  

Chapter 16 Leveraged Buyouts.  
Summary.  

Chapter 17 Variable Annuities.  
Deferred Variable Annuities.
Tax-Deferred Growth of Earnings.
The Life Insurance Component.
Ability to Annuitize.
Other Negative Features.
Are VAs Really That Bad?
Sold or Bought?
The Art of Deception.
Variable Immediate Annuities.
How Payments Are Determined.
The Purpose of Immediate Annuities.
Possible Reasons to Buy a Variable Annuity.
1035 Exchanges.
Other Considerations.
Summary.    

PART 4 The Ugly.  
Chapter18 Equity-Indexed Annuities.  
Caveat Emptor.
Minimums That Aren’t Minimums.
Penalties for Early Withdrawal.
Tax Inefficiency.
Summary.  

Chapter 19 Structured Investment Products.  
Mondo National Bank Principal Protection.
Notes: Product Features. 
More Efficient Alternatives. 
A Closer Look at Hypothetical FRATS.
Why Such “Attractive” Terms?
More Efficient Alternatives.
Being Careful Out There.
Summary.    

Chapter 20 Leveraged Funds.
The Proof Is in the Pudding.
Summary.  

Final Thoughts.
Notes.
Glossary.
Recommended Reading.
Sources of Data.
Index.

What People are Saying About This

From the Publisher

“A timely and valuable book. The authors describe twenty alternatives to investing in traditional U.S. stocks and bonds, and how they work. They tell you which ones to walk away from, which to consider (carefully!), and how to get involved. These are good-sense judgments that every investor should pay attention to.”
—Jane Bryant Quinn
Author, Smart and Simple Financial Strategies for Busy People  

“Larry Swedroe and Jared Kizer have written a different sort of investment book, and one that has been sorely needed: a comprehensive guide to the theory, peer-reviewed literature, and practical nitty-gritty of actually deploying portfolio assets. It is a gold mine for even the most experienced of practitioners, and a vital lifeline for small investors. This volume is destined to become the most marked and Post-it–noted tome on the average investment shelf.”
—William Bernstein
Author, The Intelligent Asset Allocator and The Four Pillars of Investing

“What’s missing in your library? Larry’s new Alternative Investments! You’ve already got tons of books on stocks, bonds, and funds. The Only Guide to Alternative Investments You’ll Ever Need is all about the future of investing, the new stuff that’ll give you an edge in the twenty-first century. An absolute must-read!”
—Paul B. Farrell, JD, PhD
Columnist, DowJones-MarketWatch
Author, The Millionaire Code, The Winning Portfolio, and The Lazy Person’s Guide to Investing  

“Swedroe and Kizer provide a thorough analysis of the pros and cons of each alternative investment. They recommend ‘good’ alternatives to add to a diversified portfolio of high-grade bonds and stocks. Perhaps more important, they warn investors about the dangers of truly ‘bad’ and ‘ugly’ alternatives."
—Dr. William Reichenstein, CFA
Pat and Thomas R. Powers Chair in Investment Management, Hankamer School of Business, Baylor University    

“Swedroe and Kizer have sorted through the clutter and confusion of alternative investments to provide the authoritative voice on these much hyped and frequently misunderstood financial products. Kudos to them for sharing their wisdom in a manner that can be easily understood by all.”
—Bill Schultheis
Author, The Coffeehouse Investor  

“What a great service this book is to the investing community! As investors reach out for higher returns, many will venture into the higher-risk category known as alternative investments. For those who are so tempted, this book provides an invaluable guide.”
—Edward R. Wolfe, PhD
Professor of Finance and Director of the Financial Planning Program, Western Kentucky University  

“At the risk of being clichéd, Swedroe has done it again! I make it a point to read every book written by him. This time, it’s all about alternative investments, and Swedroe, running true to form, tells it exactly as it is. He pulls no punches, he holds nothing back. If he doesn’t like something, he says so. If emerging markets equities are downright risky, he doesn’t mince his words or try to put a puffy spin on it. That is what makes reading Swedroe so fascinating.”
—Stuart Kahan
Executive editor, CPA Wealth Provider  

“For investors looking to go beyond an S&P 500 Index fund and a bond fund—and every investor should—don’t make a move until you’ve read The Only Guide to Alternative Investments You’ll Ever Need. Full of historical evidence, practical advice, and specific investment ideas, this book provides a blueprint for what to include and what to avoid in an intelligently constructed portfolio.”
—Robert Brokamp
Editor, The Motley Fool’s Rule Your Retirement service    

“As a financial journalist, I’ve been recommending Larry Swedroe’s books for years because they are filled with invaluable advice that can make any reader a more successful investor. I will now be adding The Only Guide to Alternative Investments You’ll Ever Need to my favored reading list.
—Lynn O’Shaughnessy
Financial journalist and author, The College Solution

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Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly 2.9 out of 5 based on 0 ratings. 14 reviews.
parker on LibraryThing More than 1 year ago
I was excited to get this as an early reviewer pick and enjoyed reading it. Even though I read it cover to cover, it is written as a kind of handbook for diversifying a portfolio of investments. There are obviously limitations to classifying investments as good, flawed, bad, and just plain ugly, but it works out fairly well, and you could conceivably add to your basic stocks and bonds with the "good" diversifiers such as REITs, TIPS, commodity futures instruments, and a plan for a fixed annuity, read the "ugly" section to learn what to stay away from, and think through the flawed instruments as you gain experience investing in the market. The authors cite a number of studies throughout the book, often when making a summary recommendation or warning about a type of investment, which seems jarring--shouldn't studies of investment efficiency be cited as evidence and then recommendations based on the evidence, rather than what this book tends to, namely mechanistic descriptions followed by previously published recommendations? There are of course studies cited in evidence as well, but this weakness came up several times. Another fault was that whenever a study was mentioned, the study's authors were introduced in a vague, journalistic way, almost an appeal to that author's fame, and without a critical appraisal of the data used or methods employed in the analysis, of the formula, "A famous man or men published a study that found portfolios with Instruments of Type X outperformed portfolios without." Okay, but using what data and measures, and with what methods? Serious business should involve more critical exploration. To their credit, though, Svedroe and Kizer provide citations to allow the reader to retrace their steps and provide a reading list for more detail.
jocraddock on LibraryThing More than 1 year ago
A good introduction and overview of several investment vehicles, not all necessarily "alternative," and certainly not the "only" guide one will ever need -- but catchy title. For those that have cash available at the time of writing this review (Feb. 2009), it supports opening one's mind to possibilities.
Halieus on LibraryThing More than 1 year ago
Quite comprehensive (covers almost all of the current alternative investments I oversee for myself and others). Not 100% exhaustive (focuses mainly on US and European investments) but the best overall introductory book I've seen. Full of charts, graphs, and formulas with comprehensive explanations of each, "The Only Guide to Alternative Investments You'll Ever Need" lives up to its title for the novice, experienced, and professional investors.
jaden on LibraryThing More than 1 year ago
The book is broken up into three parts - the Good, the Bad and the Ugly. Each part has several investment options like real estate, annuities, private equity, covered calls and the like. The authors go into great detail on each one, describing why you might want to invest in them, how they've performed historically and even if they tend to be a bad fit, when they might work in your situation. Each section concludes with a short summary of their findings. It's not necessarily the type of book you'd want to read cover to cover (it was slow going when I did it) but more useful as a reference. If you hear about a new investment opportunity, reading up on it in this book could save you from high fees or high risk that doesn't have compensating returns.I had expected to find more alternative investments than what were covered. Real estate, bonds and annuities are mainstream. However, as long you're interested in the historic performance of these types of investments, you'll still find it useful.All in all it provided good information to help you make good investment decisions.
PortiaLong on LibraryThing More than 1 year ago
I sat down to read this book the moment I received it from the LT Early Reviewers program and enjoyed it immensely. A WARNING, however: If you are just beginning to explore the world of personal finance and investing this book is NOT for rank beginners.This is not a book to read to decide where the bulk of your investment dollars should go - if you NEVER invest in any of these investments you will do just fine (assuming of course, that you are well grounded in the asset allocation of NON-alternative investments described in Swedroe's other books). This book is about where you might consider putting that 5% of your slice-and-dice portfolio that you have designating "money to play with".This book should be read AFTER you are familiar with the concepts presented in Swedroe's other works (and other excellent books that expound upon the "Bogle-head" type of investment strategy.) If you are not already familiar with the concepts of "Dollar Cost Averaging" "Modern Portfolio Theory" "Buy-and-Hold Investing" then this book will not be of as much use to you - you have some preliminary work to do. If you believe that you can time the market and are going to get rich by following the investment strategy promoted by some newsletter selling you market secrets then you have a LOT of homework to do. This book's intended audience seems to be those that have already "drank the Koolaid" (I'm one of them, I should know).Having gotten the warnings out of the way - for those of us who have mastered the importance of diversification, asset allocation, and cost control and who are looking to expand into the not-necessary but oh-so-fun nooks and crannies of tweaking our portfolio this book does an excellent job of illuminating the risks/benefits of the "alternative" investments we may be drawn to.Actually it does its work almost too well - because the alternative investments are presented in a best-to-worst order, by the time you hit the level that you know you are not willing to dip below you almost don't have to read the rest of the book. (I say "almost" because it is always fun to have the data to refute some self-important "expert" when they try to sell you something that you know is a lousy deal.)I was a little disappointed that, while Swedroe did address Precious Metal Equities, there was not a section devoted to buying (and taking delivery of) physical precious metals. But, with that exception, I think this covered all of the "alternative" investments I might be tempted to (and many that I would never consider touching with a counterfeit $3 bill!). Enjoy!
mikeyarmo on LibraryThing More than 1 year ago
I found this book to be a bit lacking considering it is the "only" guide you will supposedly ever need. While I thought there was a good discussion on many different alternative investment vehicles, I think the book was lacking in details on how to access all of these investments. Therefore, the book was better to gain an idea of alternative investments rather than learn what can actually be applied. Therefore, I think this is a good starter book for someone with very little investing knowledge to gain a better understanding of some of the less traditional investment products. This book will not be enough for you to apply all of these alternative investments in your own portfolio though.
jsewvello on LibraryThing More than 1 year ago
This is an excellent investment strategy book. Although I would probably never dream of trying some of these alternative investments, this book taught me something about all of them and is an invaluable resource. The best thing about this book is that it gives you sound advice on what investments to avoid. After reading this book, I am very interested in reading Swedroe¿s other books "The Only Guide To A Winning Investment Strategy You'll Ever Need" and "The Only Guide To A Winning Bond Strategy You'll Ever Need".
meklarian on LibraryThing More than 1 year ago
This book goes well into depth into a number of securities and investments that are available to the general public. Sadly, one will probably find nothing new in the 'good' category of investments that you wouldn't be able to find anywhere else- but the book goes into great detail in how the nominal and bad investments are deficient and overhyped. I appreciated the level of detail in their presentation, as they did a good job exposing information that many brokers and dealers would rather not reveal to the investing public.
davidt8 on LibraryThing More than 1 year ago
This book covers alternative investments very well. Early in January, the Wall Street Journal had a good article on alternative investments, which said that these investments are of more interest recently because good investments in stocks and bonds are increasingly difficult to find.Years ago, I heard a radio investment adviser say that his father told him to never invest in anything that eats, or needs repair. Good advice when applied to alternative investments. Don¿t invest in race horses (eats!), or directly in rental houses or apartments (needs repair). Swedroe says this about direct investments in real estate.My opinion is that alternative investments may be interesting, and apparently very attractive compared with stocks and bonds in today¿s markets, but caution is paramount.
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